Gareth Stears of Aries Insight recently shared an idea with me that I hadn’t seen explored elsewhere: using individual annuity-style factors to determine when people can access the state pension. Instead of everyone waiting for a fixed age, or taking early access with a steep actuarial reduction, his proposal would let people with shorter life expectancy draw the pension earlier at something close to the full rate. It’s the kind of idea that could solve a lot of problems while also raising questions about fairness and feasibility, so we sat down to talk it through.
Pensions Goth: When I’ve looked at early access to the state pension before, the stumbling block has always been the actuarial reduction. To keep it cost-neutral, you’d have to cut the payment so heavily that people would end up with far less than the full weekly amount. What you’re proposing feels quite different: letting people access it earlier at something close to the full rate, on the basis that some people have shorter life expectancy anyway. Is that the idea?
Gareth: More or less, yes. The way I think about it is if the state pension were treated like a pot of money, then the annual amount you receive becomes a function of an individual annuity rate. People with shorter life expectancy, often disabled people, people with long-term conditions, and sometimes full-time carers, could draw it earlier without ending up significantly worse off over their lifetime. It acknowledges the reality that they won’t draw the state pension for as long as someone healthy. And if government wanted to, it could explicitly build in more generous conversion rates for certain groups, such as carers.
Pensions Goth: That’s interesting, because at the moment there’s an implicit cross-subsidy in the system: people who die younger subsidise those who live longer. It’s not exactly a private annuity pool, but the effect is similar. If you remove that, what does it do to funding? Would we need higher NICs?
Gareth: Not necessarily. In principle, it could be designed to be cost-neutral. The Government Actuary’s Department could value the state pension as if it were a pot and then set a schedule of annuity factors that keeps the overall cost in line with what we spend today. The bigger issue is administrative complexity – producing personalised quotations, updating factors as assumptions change, building a system that can do all that efficiently. That’s not free. But automation and AI mean the cost of doing it now is probably much lower than it would have been even ten years ago.
Pensions Goth: The other challenge is selection. If people can see their annuity factors, then those who do well from early access will take it, and those who don’t will just wait. That’s predictable but messy.
Gareth: Yes, and I suspect that’s one reason no government has gone near this. Instead of a simple message, “you get your state pension at 68” you end up with “you get it when your annuity factor reaches the right point”. That’s politically difficult. It can easily be spun as “you only get your pension when you’re close to dropping.” That’s not a vote-winner.
Pensions Goth: Another thing I keep thinking about: many people who would benefit from early access are technically of working age but too ill to work, or caring full-time. Are we really talking about a state pension issue, or are we trying to fix the inadequacy of working-age benefits through the back door?
Gareth: It’s a fair question. The advantage of my idea is that it explicitly redirects part of the existing cross-subsidy. At the moment, people with shorter lives effectively lose out, because they contribute but don’t draw the pension for long. Under this model, you could give them more. And in practice, some people might stop claiming disability or carers’ benefits and draw an early state pension instead, which saves money elsewhere. But you’re absolutely right that you’d have to avoid replicating the problems in the disability benefits system: constant reassessments, changing criteria, people having to “prove” again and again that they’re unwell enough to qualify.
Pensions Goth: And then there’s fairness. What about the person who lives healthily into their early 70s, is still working, hasn’t hit their “annuity point”, and then dies suddenly? They lose out compared with the current system, where at least everyone starts from the same age.
Gareth: Yes, that’s one of the most uncomfortable scenarios. You can imagine very pointed newspaper stories about someone who did everything “right” but never got the pension they had paid into their whole life. One way around it would be to set a maximum age, say 70 or 72, where everybody automatically qualifies regardless of annuity factors. That limits the worst cases. It still introduces some selection issues, but they might be worth it to avoid people waiting too long.
Pensions Goth: On the upside, it does reinforce a longer-working-lives agenda. The incentives for deferral have been reduced over time, but in your system deferring could become more valuable again. And it also makes it clearer that the state pension alone won’t let you retire comfortably in your 50s or early 60s unless you have a serious health issue.
Gareth: Absolutely. It signals that if you want earlier or more comfortable retirement, you need private savings. And for those who genuinely can’t work longer, it offers earlier access without penalising them for life. It rebalances things in a way that’s arguably fairer across health and wealth inequalities.
Pensions Goth: Has any country tried anything similar?
Gareth: Not that I’ve seen. I looked through the Cridland Review and the recent State Pension Review, and there wasn’t a mention of anything like this. I’d expect an international example to be referenced if it existed. My assumption is that no one has gone near it, probably because of complexity, fairness concerns, and the political difficulty.
Pensions Goth: But even if the full model never happens, talking about it forces us to confront uncomfortable truths: the current system absolutely does redistribute from poorer, sicker people to those who live long and healthy lives. Making that more explicit might help us think differently about reform.
Gareth: Exactly. I’m not arguing the whole thing should be implemented, but elements of it, especially the idea of reflecting health inequalities more directly, might be useful. If nothing else, it highlights some of the structural unfairness in the current model.
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